Leveraged Buy Outshttp://www.businessinsider.com/category/leveraged-buy-outs
en-usTue, 31 Mar 2015 17:40:56 -0400Tue, 31 Mar 2015 17:40:56 -0400The latest news on Leveraged Buy Outs from Business Insiderhttp://static3.businessinsider.com/assets/images/bilogo-250x36-wide-rev.pngBusiness Insiderhttp://www.businessinsider.com
http://www.businessinsider.com/r-apollo-nearing-deal-to-buy-petsmart-for-about-8-billion-bloomberg-2014-12Apollo Is Reportedly Close To Closing The Biggest US Leveraged Buyout Of The Yearhttp://www.businessinsider.com/r-apollo-nearing-deal-to-buy-petsmart-for-about-8-billion-bloomberg-2014-12
Sun, 14 Dec 2014 06:56:00 -0500Mohammad Zargham
<p><img style="float:right;" src="http://static6.businessinsider.com/image/548d7c31eab8ea991f0d8426-602-452/leon-black-chairman-and-ceo-apollo-global-management-llc-takes-part-in-private-equity-rebalancing-risk-session-during-the-2014-milken-institute-global-conference-in-beverly-hills-california-april-29-2014-reuterskevork-djansezian.jpg" alt="Leon Black, Chairman and CEO Apollo Global Management, LLC, takes part in Private Equity: Rebalancing Risk session during the 2014 Milken Institute Global Conference in Beverly Hills, California April 29, 2014. REUTERS/Kevork Djansezian" border="0"></p><p>WASHINGTON (Reuters) - Apollo Global Management &lt;apo.n&gt; is nearing a buyout of PetSmart Inc &lt;petm.o&gt; for about $8 billion in what would be the largest leveraged deal for a U.S. company this year, Bloomberg reported on Saturday, citing unnamed sources.</p>
<p>"New York-based Apollo is in late-stage talks to buy PetSmart for about $8 billion following an auction process that has been under way for weeks, said one of the people, who asked not to be identified because the talks are confidential," Bloomberg said.</p>
<p>It said the pet-supplies retailer has a market value of $7.72 billion. A private-equity deal with Apollo would top Blackstone Group LP's &lt;bx.n&gt; $5.4 billion purchase of industrial-products maker Gates Global LLC in July, Bloomberg said.</p>
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<p>(Writing by Mohammad Zargham; Editing by Jonathan Oatis)</p><p><a href="http://www.businessinsider.com/r-apollo-nearing-deal-to-buy-petsmart-for-about-8-billion-bloomberg-2014-12#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/goldman-lbos-are-dead-2014-9A Powerful Wall Street Force Is Basically Sitting Out All This Year's Dealshttp://www.businessinsider.com/goldman-lbos-are-dead-2014-9
Tue, 09 Sep 2014 11:37:00 -0400Linette Lopez
<p><img src="http://static3.businessinsider.com/image/540f1e596bb3f79607dc85ee-1200-924/man-suit-shorts-2.jpg" alt="man suit shorts" border="0"></p><p>Shortly after the worst of the financial crisis was behind us, market participants started looking forward to the resurgence of mergers and acquisitions activity like kids waiting for Christmas Day.</p>
<p>Now — thanks in large part to low interest rates and cheap financing — the M&amp;A surge is in full effect. But it looks different than anyone expected.</p>
<p>As Goldman Sachs points out a note, leveraged buyouts are all but extinct in 2014.</p>
<p>Why?</p>
<p>Armed with cash, it's corporate buyers who are really driving this entire M&amp;A surge. Financial buyers — private equity and investment firms — are barely participating.</p>
<p>Goldman writes: "2014 is likely to be a banner year for M&amp;A in the United States with YTD volumes up about 60% yoy and on track to exceed 2006’s peak by approximately 20%. However, sponsor- related M&amp;A has not kept pace (up just 6% yoy) and as a percentage of total volumes stands at 20%, the lowest percentage since 2002 outside the financial crisis. The absence of large public-to-private activity is even more pronounced; there has been just $3 bn of deals YTD -- a small fraction of the annual average of $75 bn or so over the past decade."</p>
<p>In other words, companies are buying other companies. The stock market is, in a sense, buying itself.</p>
<p>Barely anyone is taking companies private anymore.</p>
<p><img src="http://static3.businessinsider.com/image/540f1182ecad040729dc85eb-1013-518/screen shot 2014-09-09 at 10.39.27 am.png" alt="LBO public to private deal chart" border="0"></p>
<p>Goldman suggests a few reasons why this could be happening. One is that market participants realize that incorporating the synergies companies can achieve by buying each other is the most&nbsp; effective way to create real value right now. That prospect, along with ultra-low financing, makes corporates willing to pay more money for&nbsp; the companies they acquire.</p>
<p>On the other hand, the actions that financial firms can take when they acquire companies — layoffs and other expense cuts — don't create enough value to warrant making these purchases. Company valuations are too high and actual sales growth is too slow.</p>
<p>Greenlight Capital CEO David Einhorn mentioned the strange character of M&amp;A activity in his most recent investor letter. His take on it was a bit more sinister than Goldman's. He noticed that some of companies in which Greenlight had a short position were being bought.</p>
<p>Not a good sign.</p>
<p>"Companies we are short often have serious problems of which boards and management are probably aware," <a href="http://www.businessinsider.com/low-interest-rates-impact-on-acqusitions-2014-7">said Einhorn's letter.</a> "This makes them more eager than usual to sell at any sort of premium. The prospective buyers ought to discover these problems during due diligence, which should make them walk away. But in the current environment, debt financing is so inexpensive that buyers can pay premiums and have the deals be accretive to EPS, making them more willing to ignore any problems they discover."</p>
<p>You can take Goldman's rosier picture, or go dark with David. Either way all this means that $450 billion is just sitting in global buyout firms waiting to be deployed.</p>
<p>And likely it won't be unleashed until companies are cheaper.</p>
<p>"As stated by Antony Ressler, Chairman &amp; CEO of Ares Management, 'we see the investment universe with blinking yellow lights; move slowly and carefully'. A pullback in the market appears to be the most likely catalyst to drive an increase in activity," says Goldman's note.</p>
<p>In meantime, financial firms like KKR are looking for deals outside the United States or partnering with multiple, non-finance firm buyers (think: Silver Lake working with Michael Dell).</p>
<p>It's not like Wall Street is just twiddling its thumbs — not entirely.</p><p><a href="http://www.businessinsider.com/goldman-lbos-are-dead-2014-9#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/companies-adjust-earnings-for-bond-loans-2014-5People Are Starting To Worry That Wall Street Is Taking A Big Post-Crisis Money Maker Too Farhttp://www.businessinsider.com/companies-adjust-earnings-for-bond-loans-2014-5
Fri, 30 May 2014 12:21:00 -0400Linette Lopez
<p><img style="float:right;" src="http://static2.businessinsider.com/image/4f3be0bcecad040c33000041-590-443/motorcycle-daredevil-1.jpg" border="0" alt="daredevil jumping through fire on motorcycle" /></p><p>This is how things can get out of control.</p>
<p>Wall Street firms that want to loan money to companies are increasingly allowing those companies to adjust their earnings so that they look credit-worthy enough for loans, <a href="http://www.bloomberg.com/news/2014-05-27/fed-s-junk-loan-caution-spurs-creative-accounting-alchemy.html">says Bloomberg.</a></p>
<p>Think of it as putting a little lipstick and rouge on a pig &mdash; but these pigs are made-up with tricky accounting.</p>
<p>Beth MacLean, who manages $14 billion in loans at PIMCO told Bloomberg that its time for everyone to keep an eye out for &ldquo;what is real versus what is accounting&rdquo; gimmicks.</p>
<p>It's no secret that, since the Federal Reserve lowered rates after the financial crisis, investors have turned to increasingly risky loans in their search for some kind of yield. Junk bonds (as no one on Wall Street likes to call them) have returned 145% since 2008, are up 45% this year, and yield an average of about 6%.</p>
<p>The Fed, for its part, has been eyeing this specific corporate debt junk bond issue since last summer. That's when it sent letters to a bunch of Wall Street banks warning them not to finance big corporate takeover deals with a 6 times debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio.</p>
<p>Back in 2013, 27% of deals passed that threshold. During the deal boom of 2007 it was 52%.</p>
<p>What makes 2014 especially worriesome to regulators, though, is that this flurry of deals we've seen recently is the clearing of a back log in dealmaking since the financial crisis, and the word is that it's not close to over. That means money for banks when they desperately need it. Trading, as we know, is not doing so hot, so these deals are hard to pass up.</p>
<p>In December Morgan Stanley, Credit Suisse Group AG and Goldman Sachs Group Inc&nbsp; helped KKR finance a $1.6 billion LBO that was over the Fed's threshold (at a ratio of 6.8). Now, however, three banks have opted out of doing another similarly leveraged deal with KKR to buy landscaper&nbsp;ValleyCrest Companies LLC because of pressure from the Fed, <a href="http://www.reuters.com/article/2014/05/29/kkr-loan-idUSL6N0OF00G20140529">says Reuters.</a></p>
<p>But that doesn't mean the deal won't get done. It means that someone else will do it. In this case, that someone Jefferies, a smaller less regulated boutique firm.</p>
<p>So maybe these risky loans won't end up on a systemically important bank's balance sheet,&nbsp; but they'll still be out there. And that means companies still have an incentive to pull off some accounting shenanigans in order to meet loan standards.</p>
<p>And when everyone's making money people want to keep the party going &mdash; especially when there's not a lot of parties going on anywhere else anyway. For banks and private equity firms making these loans, that means making credit agreements with junk bond borrowers that allow them to make accounting tweaks.</p>
<p>One Fed associate director, Todd Vermilyea, said earlier this month that standards &ldquo;have continued to deteriorate in 2014&rdquo; and that we may need &ldquo;stronger supervisory action.&rdquo;</p>
<p>Be careful out there.</p><p><a href="http://www.businessinsider.com/companies-adjust-earnings-for-bond-loans-2014-5#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/tim-ramey-joining-bill-stiritz-2014-1Herbalife Explodes Higher On Report That The Stock's Biggest Bull Is Joining Forces With An Outside Investorhttp://www.businessinsider.com/tim-ramey-joining-bill-stiritz-2014-1
Mon, 27 Jan 2014 15:09:00 -0500Julia La Roche
<p><img style="float:right;" src="http://static1.businessinsider.com/image/52e6bf77eab8ea676d01afa0-480-/stiritz-1.png" border="0" alt="Stiritz" width="480" /></p><p>Shares of Herbalife spiked today on news that the stock's most bullish analyst was leaving his firm.&nbsp;</p>
<p>According to <a href="https://twitter.com/CGasparino/status/427889063945703425">Fox Business Network's Charlie Gasparino</a>, D.A. Davidson analyst Tim Ramey is leaving his firm. &nbsp;According to Gasparino, he's possibly headed to join forces with Bill Stiritz.&nbsp;</p>
<p><a href="http://video.cnbc.com/gallery/?video=3000240330&amp;__source=yahoo%7cheadline%7cquote%7cvideo%7c&amp;par=yahoo">CNBC's Scott Wapner reported that Ramey sent a letter</a><span>&nbsp;out today that said he's going to do "</span><span>some&nbsp;</span><span></span><span>consulting on strategy, M&amp;A, and&nbsp;</span><span></span><span>corporate development for a&nbsp;</span><span></span><span>significant company working with&nbsp;</span><span></span><span><span class="highlight">exec</span>utives where I have had a&nbsp;</span><span></span><span>long and productive&nbsp;</span><span></span><span>relationship."&nbsp;</span></p>
<p>Ramey is known for being super bullish and incredibly vocal on Herbalife.</p>
<p>When Business Insider reached Ramey on his phone he said, "No comment."&nbsp;</p>
<p>Stiritz, 77, is the CEO/chairman of food company Post Holdings. He's also the <a href="http://www.businessinsider.com/william-stiritz-herbalife-stake-2013-9">largest individual shareholder</a> of Herbalife. &nbsp;It's been reported that he wants to help Herbalife undergo a leveraged buyout (LBO). &nbsp;</p>
<script async="" src="//platform.twitter.com/widgets.js" charset="utf-8" type="text/javascript"></script>
<p><span>At one point, Herbalife's stock was up more than 9% percent. Shares of Herbalife ended up $4, or 6.66%, to close at $64.06 per share.</span></p>
<p>Herbalife is a multi-level marketing company that sells nutritional products like weightloss shakes and supplements. &nbsp;</p>
<p>It's the company that hedge fund manager Bill Ackman is massively short. &nbsp;Ackman, who runs Pershing Square, believes the company operates as an illegal "pyramid scheme."&nbsp;</p>
<p>He publicly declared in December 2012 that he's short about 20 million shares of Herbalife with a price target of $0. &nbsp;In other words, he thinks the company will be shut down by regulators.&nbsp;</p>
<p>A bunch of other fund managers, including Ackman's rival Carl Icahn, have disagreed with Ackman and have gone long the stock. &nbsp;</p>
<p>Last week, shares of Herbalife fell about 12% on news that a&nbsp;<a href="http://www.businessinsider.com/herbalife-is-tanking-2014-1">senator from Massachusetts had sent letters to the FTC and SEC</a>&nbsp;asking that they investigate the nutrition company.</p>
<p>Here's the chart:&nbsp;</p>
<p><img src="http://static3.businessinsider.com/image/52e6cdf1eab8eaf11e9b1efd-626-443/screen shot 2014-01-27 at 4.21.26 pm.png" border="0" alt="hlf" /></p><p><a href="http://www.businessinsider.com/tim-ramey-joining-bill-stiritz-2014-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/buffett-energy-future-bankruptcy-2013-3Warren Buffett Called The Explosion Of The Biggest Leveraged Buy-Out Deal In History Last Yearhttp://www.businessinsider.com/buffett-energy-future-bankruptcy-2013-3
Fri, 01 Mar 2013 10:19:49 -0500Linette Lopez
<p><img style="float:right;" src="http://static3.businessinsider.com/image/5130c3986bb3f71003000014-400-299/buffett-2.png" border="0" alt="buffett" width="400" height="299" /></p><p>Yet again, the Oracle of Omaha's predictions have come true.</p>
<p>Last year, in his annual investor letter, Buffett lamented his&nbsp; $2 billion bond investment in Dallas-based Energy Future Holdings, saying it was a "huge mistake."</p>
<p>It's an interesting company, you may remember, because it was bought out by private equity firms in the biggest leveraged buy out deal in history back in 2007 ($48 billion).</p>
<p>You also may remember that few days ago, <a href="http://www.bloomberg.com/news/2013-02-25/biggest-lbo-failure-is-energy-future-purgatory-for-kkr.html">Bloomberg reported</a> that Energy Future Holdings faced bankruptcy because it was facing a critical deadline on the maturity of some its loans.</p>
<p>Here's what Buffett said about the company back in February 2012:</p>
<p style="padding-left: 30px;">A few years back, I spent about $2 billion buying several bond issues of Energy Future Holdings, an electric utility operation serving portions of Texas. That was a mistake &ndash; a big mistake. <strong>In large measure, the company&rsquo;s prospects were tied to the price of natural gas, which tanked shortly after our purchase and remains depressed. Though we have annually received interest payments of about $102 million since our purchase,</strong> <strong>the company&rsquo;s ability to pay will soon be exhausted unless gas prices rise substantially.</strong> We wrote down our investment by $1 billion in 2010 and by an additional $390 million last year.</p>
<p style="padding-left: 30px;">At yearend, we carried the bonds at their market value of $878 million. If gas prices remain at present levels, we will likely face a further loss, perhaps in an amount that will virtually wipe out our current carrying value. Conversely, a substantial increase in gas prices might allow us to recoup some, or even all, of our write-down. <strong>However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman.</strong></p>
<p><a href="http://www.bloomberg.com/news/2013-02-25/biggest-lbo-failure-is-energy-future-purgatory-for-kkr.html">Bloomberg</a> pointed out the exact same issues in its reporting.</p>
<p style="padding-left: 30px;">Hedging contracts that Energy Future sold to shield it against fluctuations in gas prices are expiring and will disappear entirely by the end of 2014, an event that could render Energy Future insolvent, according to the creditor who declined to named. The hedges rolling off could deflate Ebitda to $1.3 billion by the end of next year, the lender said. That&rsquo;s $2.2 billion less than Energy Future&rsquo;s interest cost in 2012.</p>
<p>Buffett's annual letter for 2012 comes out at 4:00 p.m. today. Consider this a reminder that you should pay attention.</p><p><a href="http://www.businessinsider.com/buffett-energy-future-bankruptcy-2013-3#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/energy-future-holdings-faces-bankruptcy-2013-2Six Years Later, The Biggest Leveraged Buyout Deal In History Faces Spectacular Failurehttp://www.businessinsider.com/energy-future-holdings-faces-bankruptcy-2013-2
Mon, 25 Feb 2013 12:38:14 -0500Linette Lopez
<p><img style="float:right;" src="http://static4.businessinsider.com/image/4fff2efbecad04072f000009-400-300/falling-3.jpg" border="0" alt="Falling Track And Field Face Plant Ouch Pain " /></p><p>Right before the financial crisis hit, private equity firms were doing leveraged buyouts of companies here, there, and everywhere.</p>
<p>After the crisis, however, some of those deals didn't go anywhere, and the turn-arounds that were intended never materialized.</p>
<p>Now, <a href="http://www.bloomberg.com/news/2013-02-25/biggest-lbo-failure-is-energy-future-purgatory-for-kkr.html">Bloomberg reports</a>, we may be about to see the biggest LBO deal in history go south. Energy Future Holdings Corp. (EFH) is facing bankruptcy. It was bought by KKR and TPG Capital for $48 billion in 2007, and would be the biggest LBO deal to collapse since Chrysler in 2009.</p>
<p>The firms paid so much money for EFH because they thought that natural gas prices would rise. As we know now, they didn't.</p>
<p>Specifically, the problem is that EFH's wholesale power unit, Texas Competitive Electric Holdings has $3.8 billion of loans maturing in October 14th. The company has already started restructuring talks, but they could very well fail.</p>
<p><a href="http://www.bloomberg.com/news/2013-02-25/biggest-lbo-failure-is-energy-future-purgatory-for-kkr.html">From Bloomberg:</a></p>
<p style="padding-left: 30px;">Senior lenders -- including Franklin Resources Inc., Apollo Global Management LLC, Oaktree Capital Group LLC and GSO Capital Partners -- probably would seek to seize the unit if there is a bankruptcy, said one creditor, who asked not to be identified because the process is private.</p>
<p style="padding-left: 30px;">...A bankruptcy would wipe out much of the $8.3 billion investment made by buyers including KKR, TPG and <a class="hidden_link" href="http://www.businessinsider.com/blackboard/goldman-sachs">Goldman Sachs</a> Capital Partners in what was the biggest LBO in history. It would be the highest-profile private equity-backed company to go under since Chrysler was bailed out by the U.S. government in 2009.</p>
<p><a href="http://www.bloomberg.com/news/2013-02-25/biggest-lbo-failure-is-energy-future-purgatory-for-kkr.html">For the full story, head over to Bloomberg&gt;</a></p>
<p style="padding-left: 30px;">&ldquo;This deal never made sense,&rdquo; Erik Gordon, a private- equity and law professor at the University of Michigan, said in an interview. &ldquo;It could only have been done during the times of hysterical overoptimism by everybody -- by KKR and TPG and by all the lenders who put up the money.&rdquo;</p><p><a href="http://www.businessinsider.com/energy-future-holdings-faces-bankruptcy-2013-2#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/dell-lbo-possible-without-big-shareholders-2013-2Don't Believe The Hype — The Dell Deal Can Happen Without Its Biggest Shareholdershttp://www.businessinsider.com/dell-lbo-possible-without-big-shareholders-2013-2
Wed, 13 Feb 2013 11:31:50 -0500Linette Lopez
<p><img style="float:right;" src="http://static5.businessinsider.com/image/50293f6fecad04cf2200003b-400-302/md-twitter.jpg" border="0" alt="Micheal Dell" /></p><p>If you're following the deal to take Dell private closely, you know that that the companies two biggest shareholders (outside of founder <a class="hidden_link" href="http://www.businessinsider.com/blackboard/michael-dell">Michael Dell</a>) <a href="http://www.businessinsider.com/more-trouble-for-dells-plan-to-go-private-2013-2">have voiced their opposition to the $24.4 billion sale.</a></p>
<p>Both Southeastern Asset Management and T. Rowe Price say that the price tag &ldquo;does not reflect the value of&rdquo; the company, so they'll vote against Michael Dell and private equity firm Silver Lake.</p>
<p>The thing is, as <a href="http://www.businessinsider.com/more-trouble-for-dells-plan-to-go-private-2013-2">Fortune's Dan Primack</a> pointed out in his daily newsletter this morning, that might not matter. Check out the math:</p>
<p style="padding-left: 30px;">So let&rsquo;s put this in context: What Silver Lake needs is for a majority of Dell shareholders not named Michael Dell to approve the deal. Not a supermajority, but just 51% -- or around &gt;43% of outstanding shares, once Michael Dell&rsquo;s stake is excluded. SAM and T. Rowe only hold around 13% combined, while the 10 largest outside holders (including SAM and T. Rowe) hold less than 29%. I<strong>n other words, the big institutions alone don&rsquo;t have the mathematical power to stop this. Instead, they are banking on their reputational powers of persuasion (i.e., if the large lead, the small will follow).</strong></p>
<p>So if the big shareholders do manage to sway the smaller shareholders, that might mean a price hike. If that happens, as Primack goes on to point out, Silver Lake may not be able to take that on, but Michael Dell might.</p>
<p>Point is, this deal is still very much in play.<strong><br /></strong></p><p><a href="http://www.businessinsider.com/dell-lbo-possible-without-big-shareholders-2013-2#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/are-leveraged-buy-outs-coming-back-2013-2Why The Leveraged Buyout Comeback Everyone Is Looking For Probably Won't Happenhttp://www.businessinsider.com/are-leveraged-buy-outs-coming-back-2013-2
Thu, 07 Feb 2013 16:33:00 -0500Linette Lopez
<p><img style="float:right;" src="http://static6.businessinsider.com/image/5112d5b2eab8ea3910000001-400-300/giant-slingshot-1.png" border="0" alt="giant slingshot" width="400" height="300" /></p><p>Since <a href="http://www.businessinsider.com/dell-going-private-at-1365-a-share-2013-2">Dell went private in a $24 billion leveraged buyout (LBO), </a>everyone's talking about whether the days of massive deals with multiple private equity firms throwing down cash are coming back.</p>
<p>LBOs&nbsp;&mdash; deals in which a private equity firm finances the takeover of company using relatively little equity and a whole lot more debt, were the thing to do for a while.</p>
<p>Then the financial crisis happened and, while stocks were cheap, it was impossible for PE firms to raise the necessary debt to buy companies.</p>
<p>Now everything has changed. There's cash floating around and interest rates are low. On top of that,&nbsp;<span>according to data <span style="font-family: 'Arial','sans-serif';">from Private Equity International,</span> buyout funds were the most popular private equity funds with institutional investors in 2012, raising 49% more money worldwide than in 2011 &mdash;</span> $130.9 billion.</p>
<p>Still, there are serious reasons not to get excited for an LBO bonanza.</p>
<p>Back in November, <a href="http://www.businessinsider.com/bofa-leveraged-buyout-risk-returns-2012-11">Bank of America said that </a>our current world of low yields and cheap stocks was ideal for leveraged buyout activity. Wall Street could start to see $5-$10 billion deals, but then the $20 billion deals would come, and we'd start to see some real leverage.</p>
<p>One could argue that we saw that this week when <a href="http://www.businessinsider.com/dell-going-private-at-1365-a-share-2013-2">Silver Lake and Microsoft (with a $2 billion loan) teamed up to take Dell private</a> in a $24 billion deal.</p>
<p>The thing is, as LBO pessimists might point out, that deal was only possible because CEO <a href="http://www.businessinsider.com/blackboard/michael-dell" class="hidden_link">Michael Dell</a> owned so much of the company &mdash; 16%.</p>
<p>That's why Dell was able to get over the hurdle that <a href="http://www.businessinsider.com/blackboard/bank-of-america" class="hidden_link">Bank of America</a> pointed out in its LBO report, finding enough initial equity to put into the deal.</p>
<p>From Bank of America:</p>
<p style="padding-left: 30px;">The most constraining factor for deal size appears to be equity - not debt. During the pre-Lehman environment large LBO deals were possible as private equity firms pooled resources in so-called &ldquo;club deals&rdquo;. Subsequent litigation makes it less likely that enough firms are willing to pool enough resources anytime soon for such mega deals, in our view.</p>
<p>Bank of America hedges by saying that a PE firm could team up with a pension fund or other institutional investor, but again, the environment (cheap stocks, low yields, cash floating around) has to be right.</p>
<p>That leads us to another reason why pessimists argue that LBOs aren't making a come back &mdash; the fact that stock prices are shooting up.</p>
<p>That's where things get a little weird here. <a href="http://www.economist.com/blogs/freeexchange/2013/02/capital-markets">The Economist</a> pointed out that since the crisis, something abnormal has started happening. Stocks are yielding more than corporate bonds and high yield junk bonds are falling in line with stocks.</p>
<p>This means right NOW could be a really sweet time for deals, but that may not last for long.</p>
<p><a href="http://www.economist.com/blogs/freeexchange/2013/02/capital-markets">From The Economist:</a></p>
<p style="padding-left: 30px;">This suggests the possibility of an arbitrage: borrow money at a rate comparable to the junk bond yield and use it to buy public companies. That, of course, is a key ingredient in the private equity business model. As long as the target&rsquo;s earnings grow over time and there are no problems with debt refinancing, this should generate a nice return. We may see more big leveraged buy-outs if this unusual spread persists.</p>
<p>Again, the question is how long this weird activity continues. We are seeing a great many changes these days, after all. Interest rates are rising, and <a href="http://www.businessinsider.com/the-street-warns-of-messy-credit-selloff-2013-2">who knows what that will do to corporate bond yields.</a></p>
<p>That means everyone needs to be careful out there, and that's no kind of time for a bonanza.</p><p><a href="http://www.businessinsider.com/are-leveraged-buy-outs-coming-back-2013-2#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/dell-board-vote-microsoft-buyout-2013-2Now Dell's Board Is Voting On A $24 Billion Buyout Backed By Microsoft (DELL, MSFT)http://www.businessinsider.com/dell-board-vote-microsoft-buyout-2013-2
Mon, 04 Feb 2013 20:41:58 -0500Owen Thomas
<p><img style="float:right;" src="http://static6.businessinsider.com/image/4c3c70117f8b9af275ea0000-400-300/mike-dell.jpg" border="0" alt="Michael Dell" width="400" height="300" /></p><p>A $24 billion deal to take computer maker Dell private faces one last hurdle: The company's board is voting on the offer tonight, Bloomberg <a href="http://www.bloomberg.com/news/2013-02-04/dell-board-said-to-meet-tonight-to-vote-on-leveraged-buyout.html">reports</a>.</p>
<p>According to multiple reports, Silver Lake, a buyout firm will invest $1 billion or more; Microsoft will invest $2 billion; and founder Michael Dell will contribute his 16 percent ownership of the current company and $700 million for a majority stake.</p>
<p>The deal will also be backed by $15 billion in debt.</p>
<p>Besides Michael Dell, who's the board chairman, Dell's board includes Facebook investor Jim Breyer, former American Airlines CEO Don Carty, and Ross Perot Jr., <a href="http://content.dell.com/us/en/corp/leadership-board-of-directors">among others</a>.&nbsp;</p>
<p>Silver Lake is known for doing big technology deals like the 2000 leveraged buyout of hard-drive maker Seagate Technologies.</p>
<p>Dell's cash holdings&mdash;largely overseas&mdash;also figure into the deal's value.</p>
<p>If the board approves the deal, it could be announced Tuesday morning.</p><p><a href="http://www.businessinsider.com/dell-board-vote-microsoft-buyout-2013-2#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/michael-dell-is-the-problem-with-dell-2013-1The Real Problem With Dell Is Very Simple: Michael Dellhttp://www.businessinsider.com/michael-dell-is-the-problem-with-dell-2013-1
Wed, 16 Jan 2013 11:36:00 -0500Linette Lopez
<p><img style="float:right;" src="http://static2.businessinsider.com/image/50f6d314eab8eab531000014-400-300/michael-dell-4.jpg" border="0" alt="Michael Dell " width="400" height="300" /></p><p>As of yesterday, Dell and private equity firms Silver Lake and TPG were still just talking about a massive deal to take the company private.</p>
<p>Now Fortune reports that <a href="http://finance.fortune.cnn.com/2013/01/16/dell-private-equity/">TPG has walked away</a>.</p>
<p>That leaves Silver Lake to figure out how it could take on the biggest leveraged buy-out Wall Street has seen since before the financial crisis, when a lack of credit made it impossible for a deal this large to get done.</p>
<p>All told, estimates put the size of a potential Dell deal at $23 to $25 billion, with about $5 billion kicked in by private equity firms.</p>
<p>That's nothing to sneeze at, and observers have already pointed out that <a href="http://www.businessinsider.com/why-dell-will-not-go-private-2013-1">n</a><a href="http://www.businessinsider.com/why-dell-will-not-go-private-2013-1">o private equity firm could raise that kind of capital alone</a>. So now that TPG is out (it was in totally separate negotiations from Silver Lake), we'll have to see if any other big PE players enter the ring.</p>
<p>Either way, for its part, Silver Lake isn't giving up, <a href="http://online.wsj.com/article/SB10001424127887324595704578244174200133296.html">according to the WSJ.</a></p>
<p style="padding-left: 30px;">Silver Lake Partners was in discussions Tuesday with Dell for a leveraged buyout at around $13 to $14 a share, according to a person familiar with the matter. The buyout group would include the private-equity firm, at least one other investor such as a pension or sovereign wealth fund, and Mr. Dell, this person said.</p>
<p>Michael Dell himself owns 16 percent of the firm, so that makes financing the deal a little easier. At the same time, there is an inherent conflict of interest investors consider when the management of a company enters a buy-out deal as a major player.</p>
<p>Sure, having an independant board helps with this conflict. Also, dealmakers can negotiate "go-shop" agreements that open the door to competing bids in the event of disagreements between parties.&nbsp;</p>
<p>Still, there's another, brutal issue with management's role in this buy-out that <a href="http://finance.fortune.cnn.com/2013/01/16/dell-private-equity/">Fortune's Katie Benner</a> discusses. Benner points out that Michael Dell is not an innovator, and with the power he would likely retain in this deal, he would still be at the head of a company that requires innovation.</p>
<p><a href="http://finance.fortune.cnn.com/2013/01/16/dell-private-equity/">From Fortune:</a></p>
<p style="padding-left: 30px;">..as Fortune chronicled in <a href="http://tech.fortune.cnn.com/2011/06/13/michael-dells-dilemma/">a 2011 look</a> into the company, Dell has been an architect of his company's strategy woes as much as he was the genius behind its initial manufacturing success... His plan has been to acquire scores of small companies and hope that the new entrepreneurs injected some innovation, fresh ideas and talent into the company...</p>
<p style="padding-left: 30px;">Michael Dell seemed unconcerned that these acquisitions were just too small to move the revenue and profit needles. And he alone seemed to set the parameters for the company's vision and mission...</p>
<p style="padding-left: 30px;">Most companies go private because they have an execution problem, and a buyout firm promises a solution that's often some combination of cost reduction, management changes, and a bold strategy shift. Dell is already known for being among the most cost conscious companies around. Michael Dell's likely involvement post-buyout will mean no real management change. And he has made it clear over the last six years that he does not favor bold strategy shifts. He prefers to change the company in a slow and steady fashion, much like Lou Gerstner at <a href="http://www.businessinsider.com/blackboard/ibm" class="hidden_link">IBM</a> before him. But IBM was ahead of the curve when it moved away from PCs. Dell is behind that curve, and doesn't have the luxury of time.</p>
<p>In short, Benner points out that the problem with Dell isn't that it's a public company, it's that it's a public company run by Michael Dell.</p>
<p>Harsh.</p><p><a href="http://www.businessinsider.com/michael-dell-is-the-problem-with-dell-2013-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/why-dell-will-not-go-private-2013-1And Now The Argument For Why Dell Will NOT Go Privatehttp://www.businessinsider.com/why-dell-will-not-go-private-2013-1
Tue, 15 Jan 2013 11:21:00 -0500Linette Lopez
<p><img style="float:right;" src="http://static2.businessinsider.com/image/50f58111eab8ea1e40000002-400-300/north-american-grizzly-bears-playing-1.jpg" border="0" alt="north american grizzly bears playing" width="400" height="300" /></p><p>When <a href="https://twitter.com/BloombergNews/statuses/290897320785096704">Bloomberg</a> broke the news that <a class="hidden_link" href="http://www.businessinsider.com/blackboard/dell">Dell</a> may take itself private yesterday, the Street jumped &mdash; A leveraged buy-out deal, a big one... the likes of which haven't been seen since 2007.</p>
<p>Big.</p>
<p>Maybe too big. That's the bear argument for why this deal won't get done, brought to us by Fortune's private equity reporter, <a href="http://finance.fortune.cnn.com/category/term-sheet/">Dan Primack.</a></p>
<p>His math on the deal <a href="http://www.businessinsider.com/a-rough-estimate-of-taking-dell-private-2013-1">lo</a><a href="http://www.businessinsider.com/a-rough-estimate-of-taking-dell-private-2013-1">oked a lot like ours</a>. A takeover would cost around $23 billion as Dell is currently worth around $21 billion. If investors had to put together a 35% equity commitment that would mean PE firms would have to kick in around $5 billion after Michael Dell's shares are rolled over.</p>
<p>Now, this morning it was reported that <a href="http://www.businessinsider.com/private-equity-firms-dell-is-talking-to-2013-1">Silver Lake and TPG were talking to Dell</a> about the deal. By Primack's reckoning though, a third firm would have to be brough in.</p>
<p>From Primack:</p>
<p style="padding-left: 30px;">...you'd probably need a third mega-firm to join, in addition to large co-investments from their limited partners. I've heard that <a class="hidden_link" href="http://www.businessinsider.com/blackboard/blackstone">Blackstone</a> isn't currently a player, but it did just poach Dell's top dealmaker to do tech investments (his first day was yesterday)...</p>
<p style="padding-left: 30px;">Sounds reasonable in 2007, but not in 2013. Many of those big club deals were losers, and almost all of the participating firms currently are<a href="http://www.businessinsider.com/private-equity-firms-including-bain-accused-of-manipulating-company-prices-2012-9"> defendants in a related price-fixing lawsuit</a> (including Silver Lake and TPG). All of the defendants deny any wrongdoing, but that doesn't mean they want to draw new attention to themselves by teaming up on the largest leveraged buyout in years. Moreover, firms like TPG have used their lack of recent club deals -- none in its current fund -- as a talking point when buttering up limited partners who aren't thrilled with the firm's recent performance (if it does Dell and <a class="hidden_link" href="http://www.businessinsider.com/blackboard/best-buy">Best Buy</a>, that marketing line is finished).</p>
<p>Primack goes on to point out that even if all those obstacles are overcome, the deal would still require $15 billion of leveraged financing. And while Dell does have $11 billion in cash, about $4 billion of that would have to be brought home from overseas.</p>
<p>From Primack:</p>
<p style="padding-left: 30px;">"I think it's stretching the bounds of reality," one tech-focused private equity exec explained to me after the Bloomberg report came out. "It's possible, but I wouldn't hold my breath."</p>
<p>So that's the bear side for you.</p>
<p style="padding-left: 30px;">&nbsp;</p><p><a href="http://www.businessinsider.com/why-dell-will-not-go-private-2013-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/private-equity-firms-dell-is-talking-to-2013-1Now We Know Who's Been Talking To Dell About Going Privatehttp://www.businessinsider.com/private-equity-firms-dell-is-talking-to-2013-1
Tue, 15 Jan 2013 08:33:00 -0500Linette Lopez
<p><img style="float:right;" src="http://static4.businessinsider.com/image/50f555586bb3f7e654000028-400-300/dude-youre-getting-a-dell-first-commercial.jpg" border="0" alt="dude you're getting a dell first commercial" width="400" height="300" /></p><p>Buyout firms Silver Lake Partners and TPG have held talks with <a class="hidden_link" href="http://www.businessinsider.com/blackboard/dell">Dell</a> about taking the company private, the <a href="http://online.wsj.com/article/SB10001424127887324235104578242252277078638.html">Wall Street Journal reports.</a></p>
<p>Speculation about who could be discussing a deal with the struggling hardware company ran rampant yesterday when <a href="https://twitter.com/BloombergNews/statuses/290897320785096704">Bloomberg</a> broke the news that talks were being held but didn't disclose who Dell was talking to.</p>
<p>Dell's stock rose 13% on the news.</p>
<p>Sources close to the situation said that a bidding group hasn't been finalized yet, but pension funds could participate in the investment while <a class="hidden_link" href="http://www.businessinsider.com/blackboard/jp-morgan">JP Morgan</a> handles the financing.</p>
<p>This isn't the first time CEO <a class="hidden_link" href="http://www.businessinsider.com/blackboard/michael-dell">Michael Dell</a> has talked about taking the company private. He considered it in 2010 but then took the option off the table.</p>
<p>Now might be the right time, though. When the financial crisis struck in 2008, big leveraged buyouts became in possible because firms didn't have access to credit. That has changed, and some analysts think Dell's stock price is cheap enough to make this an interesting (though expensive) deal.</p>
<p><a href="http://online.wsj.com/article/SB10001424127887324235104578242252277078638.html">From WSJ:</a></p>
<p style="padding-left: 30px;">That kind of figure could require buyers to come up with at least $7 billion of equity, based on other recent buyout financing, part of which could come from Mr. Dell's stake in the company. The rest would be a large bill even for two or three firms to share. And in general, since the financial crisis, investors in private-equity funds have frowned upon such big group deals because of the risk they can entail.</p>
<p style="padding-left: 30px;">A buyout of that type could also need in the range of $15 billion in debt, also a big chunk, especially considering that analysts and shareholders haven't been hopeful about Dell's business prospects.</p>
<p>That said: While Dell's PC business has been struggling, (it lost its place as the world's largest PC maker to <a class="hidden_link" href="http://www.businessinsider.com/blackboard/hp">HP</a> back in 2006) there are other parts of the business that make investors optimistic.</p>
<p>On investment research site <a href="http://sumzero.com/headlines/technology_and_software/DELL/152-why-dell-is-being-stalked-by-private-equity">Sum Zero</a>, Nicholas Snyder of <a href="http://unionsquareresearch.com">Union <span class="hidden_link">Square</span> Research</a> pointed out that the non-PC business was now worth more than the PC business, and that Dell has been transitioning through that change fairly well:</p>
<p><a href="http://sumzero.com/headlines/technology_and_software/DELL/152-why-dell-is-being-stalked-by-private-equity">From Sum Zero:</a></p>
<p style="padding-left: 30px;">...it (Dell) has a number of great businesses (notably servers, storage, deployment and support services, and software), and a strong market position among the small and medium businesses that will increasingly be consuming IT services.</p>
<p style="padding-left: 30px;">The concerns about the PC business are overblown and Dell's transition to a contract manufacture model have given this business a lot of operational flexibility as was well demonstrated this year...</p>
<p style="padding-left: 30px;">Unlike HP, Dell is not replacing lost PC revenue with expensively bought, non-synergistic, new revenue, but rather building out an end-to-end IBM-like services model at a lower price point. Dell has not had to take a write-down on any of their acquisitions, so at a minimum it appears they are not destroying value. Any way you slice it, this company is dirt cheap, regardless of what the PC business does...</p>
<p>So maybe we have a big LBO on our hands. Wouldn't that be nice?</p><p><a href="http://www.businessinsider.com/private-equity-firms-dell-is-talking-to-2013-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/a-rough-estimate-of-taking-dell-private-2013-1What A Deal To Take Dell Private Could Look Likehttp://www.businessinsider.com/a-rough-estimate-of-taking-dell-private-2013-1
Mon, 14 Jan 2013 15:39:00 -0500Linette Lopez
<p><img style="float:right;" src="http://static2.businessinsider.com/image/50f4671ceab8ea4356000000-400-300/bridgewater-ray-dalio-principles-leverage-lever-all-the-things.jpg" border="0" alt="Bridgewater Ray Dalio Principles leverage lever all the things" width="400" height="300" /></p><p>Now that the Street knows that <a href="http://www.businessinsider.com/dell-is-in-talks-to-go-private-2013-1">Dell Computers is considering </a><a href="http://www.businessinsider.com/dell-is-in-talks-to-go-private-2013-1">taking itself private</a>, it's time to consider what a big deal like that could look like.</p>
<p><a href="https://twitter.com/BloombergNews/statuses/290897320785096704">Bloomberg</a> broke the news that the struggling hardware company is talking to banks and private equity firms about possibly going private.</p>
<p>In Q3, it missed analyst estimates that it would generate $13.9 billion in revenue, coming in at $13.7 billion. According to Gartner, PC sales were down 5% over the holidays.</p>
<p>So how would the doctors of Wall Street deal with this patient? To buy the company from shareholders, they would do a standard private equity leveraged buyout &mdash; a deal in which the purchasing price of a company is financed by equity and debt.</p>
<p>Industry folks told <em><a href="http://www.businessinsider.com/blackboard/business-insider" class="hidden_link">Business Insider</a></em> that the deal would likely require two big players in the private equity space (Think: KKR, <a href="http://www.businessinsider.com/blackboard/blackstone" class="hidden_link">Blackstone</a>, TPG) going in on the deal together &mdash; a "club deal."</p>
<p>What PE investors see when they look at <a href="http://www.businessinsider.com/blackboard/dell" class="hidden_link">Dell</a> is a cheap company with $11 billion in cash and good cash flow.</p>
<p>"The question is 'how fast is the decline?'" one analyst told <em>Business Insider</em>. "People aren't buying PCs anymore... You would need to write a $5 billion equity check."</p>
<p>That check would lever the company 4 times and puts the purchasing price at $13.00 per share (it's currently trading at $12.60).</p>
<p><a href="http://www.businessinsider.com/blackboard/michael-dell" class="hidden_link">Michael Dell</a> owns 16% of the company, and that could make the deal easier for PE firms, but currently the company is levered 2x &mdash; it's holding some debt that would require refinancing &mdash; so the deal would need to include that.</p>
<p>"It's a stable business with great cash flow... would de-lever pretty quickly," the analyst continued. "Plus PE firms bring leaner management and operations so you could cut costs. I think someone would buy it and spin it out into two divisions. A lot of companies like <a href="http://www.businessinsider.com/blackboard/oracle" class="hidden_link">Oracle</a> and <a href="http://www.businessinsider.com/blackboard/cisco" class="hidden_link">Cisco</a> could want the server and storage business. Maybe <a href="http://www.businessinsider.com/blackboard/microsoft" class="hidden_link">Microsoft</a> wants the PC business."</p>
<p>In short, start your engines.</p>
<p>And below, check out the quick math a PE analyst did for <em>Business Insider</em>:</p>
<p><img src="http://static2.businessinsider.com/image/50f46a07ecad041535000004-605-663/screen shot 2013-01-14 at 3.25.09 pm.png" border="0" alt="math for dell deal" /></p><p><a href="http://www.businessinsider.com/a-rough-estimate-of-taking-dell-private-2013-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/heres-why-the-cracks-we-are-starting-to-see-in-the-junk-bond-market-are-ominous-for-stocks-2012-11Cracks In The Junk Bond Market Could Be Ominous For Stockshttp://www.businessinsider.com/heres-why-the-cracks-we-are-starting-to-see-in-the-junk-bond-market-are-ominous-for-stocks-2012-11
Sat, 17 Nov 2012 06:37:00 -0500Matthew Boesler
<p class="p1"><img style="float:right;" src="http://static4.businessinsider.com/image/50a776af69bedda55300000d/cracked-windshield.jpg" border="0" alt="Cracked Windshield" /></p><p>The market for junk bonds &ndash; or high yield debt &ndash; has been on a tear as investors have poured money into the asset class.</p>
<p class="p1">But that market has recently started to show some cracks.</p>
<p class="p1">Bloomberg's Lisa Abramowicz <a href="http://www.bloomberg.com/news/2012-11-14/blackrock-s-junk-bond-etf-has-record-withdrawals-as-rally-fades.html">reported earlier in the week:</a></p>
<p style="padding-left: 30px;">Investors yanked a record volume of cash from&nbsp;<a href="http://www.businessinsider.com/blackboard/blackrock" class="hidden_link">BlackRock</a> Inc. (BLK)&rsquo;s&nbsp;exchange-traded fund&nbsp;that buys&nbsp;junk bonds&nbsp;as the notes lose value for the first month since May.</p>
<p style="padding-left: 30px;">The $16.3 billion fund reported an&nbsp;outflow&nbsp;of 2.4 million shares yesterday, equal to about $218.9 million, according to data compiled by <a href="http://www.businessinsider.com/blackboard/bloomberg" class="hidden_link">Bloomberg</a>. <strong>That&rsquo;s the biggest daily withdrawal in the five-year history of the iShares iBoxx High Yield Corporate Bond Fund, the largest of its kind.</strong></p>
<p class="p1">The obvious question, then, is where the market goes from here &ndash; do the redemptions continue, or does activity level out? Although the future is uncertain, especially amidst a selloff, the consensus prediction is that it will not last long given the broader interest rate environment and investor demand for yield.</p>
<p class="p1">However, if the market comes under sustained pressure and interest rates on high yield bonds rise, it could present a headwind facing the stock market, according to Martin Fridson, the man known on Wall Street as the "dean of high yield debt."</p>
<p class="p1">Fridson told&nbsp;<em><a href="http://www.businessinsider.com/blackboard/business-insider" class="hidden_link">Business Insider</a></em><em>&nbsp;</em>that if high yield were to continue selling off, the biggest implication for other asset markets would be the removal of the cushion on the downside that the prospect of private equity buying gives big industrial stocks &ndash; paving the way for more selling in those sectors.</p>
<p class="p1">Here is Fridson's explanation:</p>
<p class="p1" style="padding-left: 30px;">Beyond high yield investments themselves, one of the most important [implications of a sell-off] would be the private equity market. We were getting to a point where you get below the average spread, and actually, we are right about at the median historical spread, slightly lower than the mean.</p>
<p class="p1" style="padding-left: 30px;">I did an analysis about a year ago and it showed that a lot of the issuance in the high yield market is related to private equity when the spread is below the median, because it basically means it's cheap financing for private equity firms.</p>
<p class="p1" style="padding-left: 30px;">There are two reasons why private equity might be active.</p>
<p class="p1" style="padding-left: 30px;">One is that stocks are cheap, so they say they can buy a public company at less than its replacement cost, and that's attractive.</p>
<p class="p1" style="padding-left: 30px;"><strong>That turned out not to be much of a factor.</strong></p>
<p class="p1" style="padding-left: 30px;"><strong> What did make a difference was the financing costs.</strong></p>
<p class="p1" style="padding-left: 30px;"><strong></strong>So, when high yield financing was cheap, you saw a surge in leveraged buyout activity. We are right now just at about the midpoint where it's sort of neutral, and neither favorable nor unfavorable to private equity.</p>
<p class="p1">In other words, Fridson found that private equity bought companies because the <em>cost of borrowing money was cheap, not because the costs of the buyout targets themselves were cheap.</em></p>
<p class="p1">Fridson continued:</p>
<p class="p1" style="padding-left: 30px;"><strong>If the market weakens further, then it will be less attractive for private equity sponsors to do LBOs.</strong> The significance of that is that it removes a positive factor on the stock side. It may be nothing more than a floor, and this of course wouldn't apply so much to some of the high tech stocks, but the companies that are more basic industry companies that tend to be good for leveraged buyouts if the price is right.</p>
<p class="p1" style="padding-left: 30px;">You could say, "Well, the prices of those stocks won't fall below a certain level, because if they do, the private equity firms will come in and buy them, and you'll get a 15 percent rise or something like that when the LBO bid comes in for a particular company."</p>
<p class="p1" style="padding-left: 30px;">So, people look at the stocks and say, "All right, we don't know exactly which ones will get bought out, but we have some idea." We're not going to assume that they ought to be 15 percent higher because they will be, but <strong>all those stocks are somewhat buoyed by that potential LBO bid.</strong></p>
<p class="p1" style="padding-left: 30px;">I think that's the most direct effect you see from high yield on another market.</p>
<p class="p1">Basically, if the junk bond market continues to deteriorate and those interest rates start to rise, the implied safety net of a private equity buyout disappears.</p>
<p class="p1">On the other hand, <span>BofA credit strategists Hans Mikkelsen and&nbsp;</span><span>Yuriy Shchuchinov write that current market conditions have become "unusually conductive for leveraging transactions for this stage in the typical cycle," and that as a result,&nbsp;<strong>"</strong></span><strong>credit investors should be concerned about more extreme releveraging in the form of leveraged buyouts."</strong>&nbsp;<a href="http://www.businessinsider.com/bofa-leveraged-buyout-risk-returns-2012-11"><strong>Read more here &gt;</strong></a></p><p><a href="http://www.businessinsider.com/heres-why-the-cracks-we-are-starting-to-see-in-the-junk-bond-market-are-ominous-for-stocks-2012-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/bofa-leveraged-buyout-risk-returns-2012-11Leveraged Buyouts Are About To Make A Big Comeback On Wall Street, And We Could See A $20B Dealhttp://www.businessinsider.com/bofa-leveraged-buyout-risk-returns-2012-11
Tue, 06 Nov 2012 15:31:00 -0500Matthew Boesler
<p><img style="float:right;" src="http://static3.businessinsider.com/image/50997013eab8ead975000001-400-/archimedes-lever.png" border="0" alt="Archimedes lever" width="400" /></p><p>The leveraged buyout &ndash; a deal structure made popular during the Wall Street boom of the 1980s and again in the wake of the tech bubble &ndash; could become much more common soon, according to a report from BofA <a href="http://www.businessinsider.com/blackboard/merrill-lynch" class="hidden_link">Merrill Lynch</a>.</p>
<p>BofA credit strategists Hans Mikkelsen and&nbsp;<span>Yuriy Shchuchinov write that current market conditions have become "unusually conductive for leveraging transactions for this stage in the typical cycle," and that as a result, <strong>"</strong></span><strong>credit investors should be concerned about more extreme releveraging in the form of leveraged buyouts."</strong></p>
<p>A leveraged buyout typically involves a relatively small equity investment into a takeover target, with loans that are usually multiples of the size of the equity in terms of dollar value making up the difference.</p>
<p>In the aftermath, companies often have to resort to stringent cost-cutting measures to service the debts that were used to execute the buyout.</p>
<p>The bigger the deal, the more the debt.</p>
<p>And the BofA strategists say they even envision deals up to $20 billion:</p>
<div class="column">
<p style="padding-left: 30px;"><span>Clearly at this stage in the cycle we are nowhere near once again talking about <a href="http://www.businessinsider.com/blackboard/home-depot" class="hidden_link">Home Depot</a> as an LBO candidate. In fact, most LBOs will likely initially be rather small &ndash; less than $5bn with a few up to $10bn in transaction enterprise value, consistent with deals seen post-Lehman.</span></p>
<p style="padding-left: 30px;"><span>However, in an area of historically low yields and abundant liquidity in the public markets, with banks having finally rebuilt capital, <strong>we think we have the ingredients in place for even larger deals, up to $20bn. </strong></span></p>
<p><span><span>Markets have QE3 to thank in part for the return of the LBO, according to the report. As the Federal Reserve continues to buy mortgage-backed securities, yields grind lower, and banks no longer see most fixed-income assets as attractive investments.</span></span></p>
<p>Now, Mikkelson and <span>Shchuchinov think&nbsp;</span>banks will instead be forced to lend in order to make money, and that <strong>"they will also be willing to expand lending for highly leveraged transactions</strong> (as long as leverage stays below 6x per guidance from the regulators)."</p>
<p>The BofA strategists expand on this by noting that finding sufficient equity to put into the LBO investments will be the real limiter on deal size:</p>
<p style="padding-left: 30px;"><span>The most constraining factor for deal size appears to be equity - not debt. During the pre-Lehman environment large LBO deals were possible as private equity firms pooled resources in so-called &ldquo;club deals&rdquo;. Subsequent litigation makes it less likely that enough firms are willing to pool enough resources anytime soon for such mega deals, in our view.</span></p>
<p style="padding-left: 30px;"><span>However, the example of Synthes, discussed below, highlights that we could still potentially see a three-firm club deal for a $20bn LBO &ndash; such a deal would likely require perhaps $2bn of equity from each private equity firm. Furthermore, nothing prevents private equity from pooling resources with alternative investors such as pension funds.</span></p>
<p><span>Mikkelson and Shchuchinov explain that last year, when <a href="http://www.businessinsider.com/blackboard/johnson-and-johnson" class="hidden_link">Johnson and Johnson</a> acquired Synthes, a post-transaction <a href="http://www.businessinsider.com/blackboard/sec" class="hidden_link">SEC</a> filing revealed that three private equity firms came together and submitted a $20 billion bid to buy out the company.</span></p>
<p>Although the consortium of PE firms ultimately didn't win the deal,&nbsp;the BofA strategists write that "it also makes the clear point that a $20bn LBO was feasible at the time."</p>
<p>Since bond yields &ndash; and thus the cost of financing a big buyout with mostly debt &ndash; have only continued to fall since the Synthes deal, Mikkelson and Shchuchinov figure the current environment has only gotten better for LBOs.</p>
</div><p><a href="http://www.businessinsider.com/bofa-leveraged-buyout-risk-returns-2012-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/the-key-to-private-equitys-success-is-their-incredible-ability-to-finance-2012-1The Key To Private Equity's Success Is Their Incredible Ability To Financehttp://www.businessinsider.com/the-key-to-private-equitys-success-is-their-incredible-ability-to-finance-2012-1
Tue, 24 Jan 2012 14:42:00 -0500Raki Shah
<p><img style="float:right;" src="http://static5.businessinsider.com/image/4f15a7a2eab8eab12d000026-400-/dow-jones-private-equity-analyst.jpg" border="0" alt="Dow Jones Private Equity Analyst" width="400" /></p><p>Much like I do with Venture Capital investments, I've often wondered how much long-term value Private Equity firms create for their portfolio companies and society as a whole. PE shops use a combination of financial engineering and operational savvy to generate the required above market returns that their limited partner investors seek. But do these companies that &ldquo;go private&rdquo; end up as better run companies? From an Atma perspective, do they become more sustainable as a result and create lasting value for the general public? Or is it a case of corporate raiders manufacturing gains in the short-term while leaving portfolio companies in a weak long-term position?</p>
<p>Many critics (and more recently, anti-Mitt Romney candidates) have the notion of "barbarians at the gate" in which these firms layoff employees en masse, burden the companies with unsustainable debt loads, and run the company merely for quick returns. A recent <a href="http://www.businessinsider.com/blackboard/wsj" class="hidden_link">WSJ</a> article, which examined the performance of <a href="http://www.businessinsider.com/blackboard/bain-capital" class="hidden_link">Bain Capital</a> portfolio companies during Romney's tenure, might support this view. Although creating nearly 50% return for investors, roughly 30% of the companies went bankrupt within 8 years of investment. Further, only 10 deals (out of 77) created the lion share of the returns (4 of which subsequently went bankrupt). Bain Capital claims the data is skewed as it generally invests in more troubled companies than most; either way, it surprising that a firm anchored by strategic prowess had significantly more losers than winners in its portfolio.</p>
<p>The truth is that it is virtually impossible to get statistically significant data to analyze whether companies are better in the long run. So I took a different approach. I put together some hypothetical numbers to figure out what kind of financial improvement would be necessary to generate the required rate of returns (~20-30%) for PE investors within a typical investment period (five years). The result of my high level experiment: financing matters more than operational improvement.</p>
<p>In their heyday, firms were able to borrow almost 80% of their purchase price. In this scenario, a nominal 5% increase in operations (annualized EBITDA growth) would yield a whopping 29% annual internal rate of return (IRR) for investors five years later. Cutting back the debt to 50% would cut their return in half. In the same example, doubling the improvement in performance (ie. 10% EBITDA growth), would only yield a 12% incremental IRR. Even a slight decrease in operating performance would yield positive returns. And upon exit, the company is still left with almost four-fifths of the original debt load.</p>
<p>I can send anyone who wants to see my analysis, but I would have hoped that company improvement would have mattered more. Negotiations with suppliers, closure of underperforming locations, some minor changes in operations can readily achieve a 5% lift. And it is clear that as debt becomes harder to come by, PE returns have significantly dropped. It is also hard to find big successes through the PE umbrella. Even the Bain home runs like <a href="http://www.businessinsider.com/blackboard/staples" class="hidden_link">Staples</a> have struggled post-IPO. And even if Staples created more jobs, what about the thousands of local office supply dealers that were forced to close its doors?</p>
<p>The fact that leverage matters most in these deals shows that investment performance has little to do with how the companies actually do long-term. We are in the midst of the second PE hangover in which overleveraged companies bought up by firms at the debt market peak have yet to restructure (remember Chrysler or Hilton?). It is clear that private equity firms will have to work harder on the operational side to generate the kinds of returns their limited partners are accustomed to. Much like governments these days, firms have to work on both cleaning up their existing debt and investing with less borrowing capacity. So if you are looking to invest in a PE firm, you may want to look at their ability to garner debt and sell companies much more than their track record of improving company operations.</p>
<p><em><a href="http://atmabus.blogspot.com/2012/01/private-equity-enigma.html">This post</a> originally appeareted at <a href="http://atmabus.blogspot.com/">Atma Business Blog.</a></em></p><p><a href="http://www.businessinsider.com/the-key-to-private-equitys-success-is-their-incredible-ability-to-finance-2012-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/private-equity-firms-just-finished-off-a-huge-2011-with-deals-up-40-2012-1Private Equity Firms Just Finished Off A Huge 2011, With Deals Up 40%http://www.businessinsider.com/private-equity-firms-just-finished-off-a-huge-2011-with-deals-up-40-2012-1
Tue, 17 Jan 2012 18:17:55 -0500Steven Miller
<p><img style="float:right;" src="http://static2.businessinsider.com/image/4c44677f7f8b9ae563e50000/celebrate-perks.jpg" border="0" alt="celebrate perks" /></p><p>Private equity may be taking its lumps from Republican presidential candidates trying to derail former <a class="hidden_link" href="http://www.businessinsider.com/blackboard/bain-capital">Bain Capital</a> chief Mitt Romney&rsquo;s nomination bid, but sponsor activity has continued unabated. <a class="hidden_link" href="http://www.businessinsider.com/blackboard/indeed">Indeed</a>, despite difficult conditions in the credit markets, private equity firms quietly inked $35 billion of new leveraged buyouts in the fourth quarter, the most in four-years, according to the <a class="hidden_link" href="http://www.businessinsider.com/blackboard/lcd">LCD</a> team at S&amp;P Capital IQ, up from $22.5 billion between July and September.</p>
<p>That pushed LBO activity up a muscular 40.5% for all of 2011, to $111 billion from $79 billion in 2010.</p>
<p>Looking ahead, though, the outlook for new activity has dimmed because of financial conditions, not political consideration. Participants expect a flat year of LBO deal making, at best. And, if the European situation worsens, volume could track lower.</p>
<p>The reasons are fourfold. First, the summer chill brought on a less deal-friendly environment. Some stats:</p>
<p>In the fourth quarter, the average purchase multiple rose half a turn, to 9.1x, among large LBOs &ndash; those for issuers with at least $50 million of EBITDA &ndash; even as debt multiples eased to 5.1x, from 5.3x. Sponsors bridged the gap, pushing the average LBO equity contribution to 42% in the fourth quarter, from 35% during the first nine months of the year. As equity contribution increase, potential sponsor returns by definition decline and, thus, fewer deals are able to clear hurdle rates. Carlyle Group and Hellman &amp; Friedman&rsquo;s $3.9 billion fourth quarter LBO of Pharmaceutical Product Development is a recent example. The sponsors kicked in $1.76 billion of equity, according to public filings, or 45%, with the balance financed with a $1.3 billion loan and a $700 million bridge loan to a high-yield bond offering.</p>
<p>The second break on LBO volume is reticence among leveraged-finance underwriters after the August-September market downturn, which forced dealers to sell some new issue loans and bonds at steeper-than-expected-discounts. For this reason, inking public-to-private deals with long lead times is more challenging than it was in early 2011 when liquidity was flowing.</p>
<p>The third holdup for LBOs is the oft-mentioned uncertainty surrounding&nbsp;, which has made projecting cash flows a tricky business.</p>
<p>Finally, players say cash-rich strategic buyers are formidable competitors for properties. These corporate buyers can often outbid PE firms on the strength of (1) their low funding costs, (2) their typically lower investment hurdle rates, and (3) their ability to create &ndash; or at least imagine &ndash; synergies.</p>
<p>With all of this in mind, it&rsquo;s no wonder leveraged finance players expect the volume of large LBOs &ndash; particularly those of the public-to-private variety or that require regulatory approval &ndash; to be limited in the near term, with PE firms focusing instead on middle market deals and tuck-in acquisitions in which synergies are possible.</p>
<p>The trend is clear in the forward calendar numbers. At year end, S&amp;P Capital IQ&rsquo;s LCD team tracked just $5.1 billion of visible leveraged loans in the offing, the lowest amount in two years.</p><p><a href="http://www.businessinsider.com/private-equity-firms-just-finished-off-a-huge-2011-with-deals-up-40-2012-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/theodore-forstmann-dies-of-brain-cancer-age-71-private-equity-2011-11The Amazing Life And Times Of Teddy Forstmann, The Godfather Of Private Equityhttp://www.businessinsider.com/theodore-forstmann-dies-of-brain-cancer-age-71-private-equity-2011-11
Mon, 21 Nov 2011 11:48:03 -0500Linette Lopez
<p><img style="float:right;" src="http://static5.businessinsider.com/image/4eca7019eab8ead72f000031/theodore-forstmann-with-padma-lakshmi.png" border="0" alt="theodore forstmann with padma lakshmi" /></p><p><a class="hidden_link" href="http://www.businessinsider.com/blackboard/teddy-forstmann">Teddy Forstmann</a> pioneered private equity in the late 1970s and 80s. He was the first man to use borrowed money to buy a company, fix it, and then sell it for profit.</p>
<p>Last night he died of brain cancer at age 71, the <a href="http://dealbook.nytimes.com/2011/11/20/remembering-teddy-forstmann/?scp=4&amp;sq=theodore%20forstmann&amp;st=Search">NYT reports</a>, and he will be remembered for his amazing record of charitable giving, and for living a life surrounded by glamorous women and powerful people.</p><h3>Forstmann was born into a wealthy Connecticut family and attended Yale and Columbia. </h3>
<img src="http://static2.businessinsider.com/image/4d754eb7ccd1d50944020000-400-300/forstmann-was-born-into-a-wealthy-connecticut-family-and-attended-yale-and-columbia.jpg" alt="" />
<p><ul>
<li>His Grandfather was one of the richest men in the world, and owned a fabric company.<br /><br /></li>
<li>He became obsessed with doing deals early in life, after reading a book about Howard Hughes. "<a href="http://www.google.com/hostednews/ap/article/ALeqM5j6km_JijT_7q5viG6dzdvJv5-W9Q?docId=9f680ea86e424e428a2daf9256aefd51">This guy (Hughes)loved doing deals,"</a> he told the Associated Press in 1996.<br /><br /></li>
<li><strong>He eventually went to Yale, where he played goalie for the ice hockey team, and graduated from Columbia Law School. He paid for law school by gambling at bridge.</strong></li>
</ul></p>
<br/><br/><h3>He founded his private equity firm Forstmann Little and Company in 1978</h3>
<img src="http://static2.businessinsider.com/image/4eca6e4deab8eaa12d000032-400-300/he-founded-his-private-equity-firm-forstmann-little-and-company-in-1978.jpg" alt="" />
<p><p>In 1978, Forstmann founded private equity firm Forstmann, Little and Company.</p>
<p>They created the leveraged buy-out business. <strong>In it's history, <a href="http://en.wikipedia.org/wiki/Theodore_J._Forstmann">the company</a> has made 31 acquisitions and/or investments and returned more than $15 billion of profits to investors.</strong> Some of it's acquisitions include, Dr. Pepper, IMG, Yankee Candle, and Gulfstream Aerospace.</p>
<p style="padding-left: 30px;"><em>&ldquo;Once I decide to do something, I want to win in the worst way,&rdquo; Forstmann told the Washington Post in 1995. &ldquo;I will do anything within the law to win.&rdquo; His favorite sports, he said, were golf, tennis and deals.</em> <a href="http://www.businessweek.com/news/2011-11-21/ted-forstmann-who-rang-alarm-on-junk-bond-buyouts-dies-at-71.html">(via BusinessWeek)</a></p></p>
<br/><br/><h3>He had a significant role in the biggest deal in PE history — RJR Nabisco in 1988</h3>
<img src="http://static2.businessinsider.com/image/4eca6b91eab8eacf2f00002b-400-300/he-had-a-significant-role-in-the-biggest-deal-in-pe-history--rjr-nabisco-in-1988.jpg" alt="" />
<p><p>This is the deal that made Theodore Forstmann immortal&mdash;and he was on the losing end.</p>
<p>F. Robert Johnson, the CEO of RJR Nabisco, wanted to take his firm private, and everyone wanted to do the deal: Morgan Stanley, Goldman Sachs, Salomon Brothers, and more. Eventually KKR got it, and bought the company from the board for $109 a share.</p>
<p>It was the largest corporate takeover in history &mdash; the LBO was $25 billion. The book and HBO movie <em>Barbarians At The Gate </em>is about this deal, and it's name comes from Forstmann <a href="http://www.nytimes.com/2011/11/21/business/theodore-j-forstmann-a-takeover-pioneer-dies-at-71.html?_r=1&amp;ref=theodorejforstmann">(via NYT)</a>:</p>
<p style="padding-left: 30px;"><em>While he was golfing in the late 1980s with Richard L. Gelb, then the chairman of Bristol Myers, the discussion turned to a surge in takeovers by buyout firms. &ldquo;What does it all mean?&rdquo; Mr. Gelb asked Mr. Forstmann.</em></p>
<p style="padding-left: 30px;"><strong><em>&ldquo;It means the barbarians are at the gate,&rdquo; Mr. Forstmann replied. &ldquo;And they&rsquo;ll be coming for you next.&rdquo;</em></strong></p></p>
<br/><br/><a href="http://www.businessinsider.com/theodore-forstmann-dies-of-brain-cancer-age-71-private-equity-2011-11#and-then-he-started-criticizing-all-the-lbos-4">See the rest of the story at Business Insider</a> http://www.businessinsider.com/how-private-equity-screens-for-lbo-candidates-2011-10How Private Equity Firms Screen For LBO Candidateshttp://www.businessinsider.com/how-private-equity-screens-for-lbo-candidates-2011-10
Wed, 26 Oct 2011 11:00:00 -0400Axial
<p>The <a href="https://www.axialmarket.com/blog/2010/11/leveraged-buyouts-a-primer-for-business-owners/">LBO</a> as a means by which to acquire private companies has become well-practiced among the private equity industry and is now standard practice.</p>
<p>Yet it can be used by anyone who has the experience, credibility and business to secure the confidence and credit from the required financing sources needed to execute an LBO.</p>
<p>The <a href="https://www.axialmarket.com/blog/2010/11/leveraged-buyouts-a-primer-for-business-owners/">Leveraged Buyout</a> gained prominence in the 1980&rsquo;s thanks to Jerome Kohlberg and his associate, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/henry-kravis">Henry Kravis</a>. These two and the latter&rsquo;s lawyer cousin, George Roberts, would form a triumvirate in private equity with the birth of their firm <a href="http://www.kkr.com/">KKR</a> and immortalized in the book <em><a href="http://www.amazon.com/Barbarians-Gate-Fall-RJR-Nabisco/dp/0061655554/ref=sr_1_1?ie=UTF8&amp;qid=1319493718&amp;sr=8-1">Barbarians at the Gate</a></em>. Today, over 4,100 private equity firms exist, and they buy thousands of companies each year. Knowing what they look for and how they think about financing their transactions is critical.</p>
<p>As its name implies, the use of financial leverage, or debt, is one of the primary elements distinguishing an LBO from a traditional acquisition executed with cash or stock. Leverage can <a href="https://www.axialmarket.com/blog/2010/11/leveraged-buyouts-a-primer-for-business-owners/">enhance equity returns</a> to the sponsors, who have discretionary control over all cash flows that exceed the debt payments incurred. Because interest payments on debt are tax-free, leverage improves equity returns by reducing the amount of equity required to acquire a company and furthers those returns thru the favorable tax treatment interest payments receive in the US tax code.</p>
<p>Not every company is a viable LBO candidate. Below are characteristics that LBO professionals typically seek when assessing a target company&rsquo;s viability for an LBO-style change of control transaction.</p>
<h4>Hard Assets</h4>
<p>Banks will lend more cheaply against hard assets as collateral. If your assets go up and down in the elevator each and every day (your assets are your people), it can be very challenging to gain bank financing. Bank debt is usually collateralized by the physical assets of the company, so the more plentiful and valuable the assets - machinery, inventory, receivables, real estate - the more available and cheaper the leverage becomes. While these hard assets certainly help the credit structure, intangibles like brand, goodwill, and human capital have become increasingly important considerations in an LBO.</p>
<h4>Steady Cash Flows</h4>
<p>Free cash flow is king in an LBO; free cash flow is generally defined as the amount of cash a business generates in excess of its requirements to maintain its current operations. The reason this is so critical is because the free cash flow of the business determines how much leverage the business is capable of supporting without imperiling the business&rsquo; ability to stay solvent in a downturn.</p>
<h4>Maturity of Market</h4>
<p>Companies selling into an established, well-defined market (automotive pumps and valves, soft drinks) are more conducive to an LBO transaction than those companies selling into a fledgling market (cloud computing, social networks, nanotech); while growth prospects for the company are important, they are secondary to stability. A mature market with predictable demand and revenue, and no game-changing, competitor-crushing disruptions in sight is conducive to the LBO transaction because the cash flows of the company are likely to be very predictable.</p>
<h4>Low Capital Expenditure (CapEx) Requirements</h4>
<p>When it comes to the LBO, the less annual investment that is required to operate a business, the better. In the case of an LBO, high CapEx is unwelcome, as it consumes cash that could otherwise go to paying interest payments, principal debt payments, or dividends to the equity holders.</p>
<h4>Non-core Assets</h4>
<p>There is no easier way to boost cash flow than to liquidate non-vital assets that carry an attractive value to the right bidder. An experienced financial sponsor keen on leaning out a business might spot this kind of low-hanging fruit quickly, and immediately moves to sell anything of value that is not required to operate the core business. If a publisher drives most of its revenue from digital media but maintains a costly and unprofitable printing press, it can sell the latter for cash.</p>
<p><em><br />After identifying the above micro-economic characteristics, LBO practitioners target companies that fall into the following categories:</em></p>
<h4>Forced Divestitures</h4>
<p>Regulators from time to time mandate corporate spin-offs for antitrust reasons. For instance, if two coal companies merging would cause their combined revenue or market share to eclipse the acceptable antitrust thresholds, the merger may be allowable only contingent upon spinning off certain mines to a third party. The regulatory divestiture typically presents a buyer with a good deal, as the sale process is typically extremely hurried so as not to delay the proposed merger.</p>
<h4>Non-core Corporate Divisions</h4>
<p>Sometimes some of the subsidiaries or divisions of large conglomerates no longer make sense or fit in with the future of the company&rsquo;s plans. In these instances, companies will &ldquo;spin off&rdquo; these no longer relevant divisions, realize the cash, and reinvest it in accordance with the new strategic directives of the organization. Recently, <a href="http://www.bizjournals.com/nashville/news/2011/10/07/smith-wesson-to-sell-franklin.html">Smith &amp; Wesson (Nasdaq: SWHC) announced that it is spinning off its security division</a> to concentrate on its more profitable firearms business. Likewise, if a holding company oversees five disparate operating companies like a rail car fleet, a timber farm, a solar power plant, a bottling company, and a ski resort, and decides it wants to merge and focus solely on the first two, it needs to sell the other three.</p>
<h4>Businesses with Sub-par Management</h4>
<p>The most successful private equiteers often possess high degrees of <a href="https://www.axialmarket.com/blog/2011/09/3-reasons-specialization-matters-private-equity/">specialization</a>, and can add tremendous value to the organizations they acquire. It&rsquo;s easy for savvy industry veterans to spot solid businesses underperforming because of poor management. Such a business is an attractive LBO candidate to a buyer who is confident enough in his ability to more efficiently operate it and survive the debt burden.</p>
<h4>Businesses Lacking a Succession Plan</h4>
<p>This qualifier is especially pertinent today as baby boomers retire in the United States and leave healthy businesses lacking heirs. Private equity firms typically love these opportunities to acquire a high quality business that doesn&rsquo;t need much help but where the owner simply wishes to cash out.</p>
<h4>Businesses Impaired by Underlying Industry</h4>
<p>Sometimes businesses with attractive long-term earnings capability are held hostage by a poor underlying industry or economy causing deflated trading prices and valuations. Such opportunities are attractive, offering a chance to buy companies for cheap before an expected rebound in the market price.</p>
<p><strong><em>Key Takeaway</em></strong>: Knowing how private equity firms screen for and think about LBO feasibility is beneficial to management teams who are considering an <a href="http://www.leaders-llc.com/media/documents/ManagementBuyOut.pdf">MBO</a>, advisors evaluating which assignments to take on, entrepreneurs thinking about who to sell to, and corporations evaluating which buyers will be interested in purchasing their non-core divisions.</p>
<p><em>(Source: <a href="http://www.scoopbooks.com/">ScoopBooks&rsquo;s</a></em> The Practioner&rsquo;s Guide to Investment Banking<em>)</em></p>
<p><strong>Read more posts on <a href="https://www.axialmarket.com">AxialMarket &raquo;</a></strong></p><p><a href="http://www.businessinsider.com/how-private-equity-screens-for-lbo-candidates-2011-10#comments">Join the conversation about this story &#187;</a></p>